Leveraging the energy transition : the role of long-term contracts

Abstract

The interaction of “Contracts”, “Markets” and “Law and Regulation” have informed the economic analysis of market economies for over 40 years. One of the main lessons learnt is that (contracts), (markets) and (law and regulation) always interact and co-determine the outcome and performances of the electricity industry. This study identifies the “electricity world” in which long term contracts (LTCs) can be implemented. We distinguish between: 1° The old primary, and ideal, world of “Just Building Open Markets”, the priority of our European authorities at the beginning of the 21st Century, to transition away from the previous world of vertically integrated monopolies and nationally closed borders. 2° The secondary, empirical, world of “Co-building a Set of Working Markets”, in which law and regulation intervened into the pricing of peaking periods (in the wholesale market) and of capacity adequacy (in a parallel market), as well as for entry into nuclear or green generation investments (support schemes). 3° Finally, the tertiary, fully policy driven world of an “Accelerated Decarbonization Push towards a Net Zero Industry”; where we now stand in the EU, expecting to transition in about a decade, around 2035, to entirely decarbonized electricity production and to already strong electrification of all professional energy consumption. In the meantime, LTCs offered to professional consumers, although not a core element of most of the market designs implemented in the succession of “worlds of electricity markets”, has always existed in parallel to the mainstream changes.